Good day and welcome to the Ideal Power Inc. Fourth Quarter and 2015 Full Year Conference Call and Webcast. Today’s conference is being recorded. At this time, I would like to turn the conference over to Matt Hayden, Chairman of MZ North America. Please go ahead.

Thank you. Good afternoon. I would like to thank you all for taking time to join us for Ideal Power’s 2015 year end call. Your hosts today are Mr. Dan Brdar, Chairman and CEO, as well as Mr. Tim Burns, the company’s Chief Financial Officer. Dan will provide a business update, which will cover partner announcements, product updates, while Tim will discuss the financial results. A press release detailing these results crossed the wire this afternoon at 4 P.M. Eastern and is also available on the company’s website, idealpower.com. Following management’s prepared comments, we will open the floor to questions for those of you who are dialing in and also those participants joining via webcast. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast including those regarding future financial results and industry prospects are forward-looking and maybe subject to a number of risks and uncertainties that could cause actual results to differ materially than those described in the call. Please refer to the company’s SEC filings for a list of associated risks and we also would refer you to the company’s website for more supporting industry information. Thank you. And at this time, I would like to turn the call over to Dan. Dan, the floor is yours.

Thank you, Matt. Our focus for 2015 was primarily around three areas, the first was capturing the system integration channel and alliance partners, which we believe will be the leaders in the commercial and industrial energy storage market that it develops and matures; the second was to bring out innovative, highly differentiated products that give our partners a superior rate of return on their projects; and third was to continue innovating to both advance the state of our technology and to build our portfolio of intellectual property as necessary to protect our core assets and strengthen our competitive advantages. Executing on all three of these areas is essential for us to achieve the level of growth we are targeting in the coming years. We made strong progress on all three of these areas in 2015 and as a result are well positioned in 2016 for significant growth in our business. Before we look at 2016 in more detail, I want to recap key progress made during 2015 with an emphasis on developments during the fourth quarter and have Tim review the financials. First and foremost, the fourth quarter was highlighted with the largest order in our company’s history. This order for 14.5 megawatts of our power conversion products from Gexpro is for using battery energy storage systems predominantly in California, New York and Hawaii. This order is for a mixture of the company’s 30 kilowatt battery converter, grid-resilient 30 kilowatt multi-port power conversion system and our newly released grid-resilient 125 kilowatt power conversion system, with the 125 kilowatt system making up the majority of the order. We believe this commitment validates the expected growth in the market we anticipate for 2016 and further reinforces our market leadership and providing power conversion systems for behind the meter energy storage solutions. The…

Thank you, Dan. I will run through the fourth quarter and the full year 2015 financial results. Total revenue in 2015 which consisted entirely product revenue was $4.3 billion or an increase of 250% compared to product revenue of $1.2 million in 2014. Total revenue for the fourth quarter, which also consisted entirely of product revenues was $967,000 or an increase of 159% compared to $373,000 in product revenues for the fourth quarter of 2014. We have seen a meaningful shift in our product mix. In the first half of the year our revenue was largely from our 30 kilowatt battery converter and to a much lesser extent in the second quarter our grid resilient 30 kilowatt two-port and multi-port power conversion systems. In the third quarter of the year, our revenue consisted of sales of our 30 kilowatt battery converter, strong sales growth for our grid resilient 30 kilowatt systems and initial sales of our 125 kilowatt products. In the fourth quarter, over half of our revenue was from sales of our 125 kilowatt product with the grid resilient 30 kilowatt power conversion systems displacing the 30 kilowatt battery converter due to market demand for the new capabilities of these systems. We expect our 2016 product mix to more closely align with the fourth quarter product mix although this could be impacted by the timing and size of individual customer orders. Gross margins were 9% in 2015 compared to negative 22% gross margins in the prior year. The year-over-year improvement in gross margins reflects the inherent leverage in our business model. Gross margins in the fourth quarter were 1% compared to negative 36% gross margins in the fourth quarter last year. Our fourth quarter gross margins were negatively impacted by the late Q3 introduction and initial low volume production…

Thanks, Tim. While 2016 is off to a volatile start for the markets and global economies in general, the fundamental drivers for our business are unchanged of the need for energy storage and the problems it solves are not driven by the price of oil or other factors that are grabbing the near-term headlines. We are excited about the size and the capability of the companies coming into the storage space as integrators, distributors and financers including several Fortune 500 companies. While large companies take longer to execute, they can bring significant scale to the storage market and our evidence of both the maturing nature of energy storage and the scale of the opportunity it represents. The innovative nature of our products and our technology roadmap make us an attractive partner for these new market entrants. Having our products receive third-party recognition helps us well. Solar Power World Magazine recently announced their selection of top inverter products of 2015. The selections were based on innovation, flexibility and cost improvements, where they are focused on differentiated products that are being actively deployed in the market. We are pleased to see our grid-resilient 30 kilowatt multi-port power conversion system selected from top inverter product list by one of the leading renewable energy publications as it validates our approach to product development and technological innovation and raises our visibility with potential partners and customers. We are working to capture key new players entering the storage market in 2016 and already have equipment under evaluation at new potential partners with recognizable global brands. While the growth in the storage market over the next couple of years will likely be lumpy, we expect to see strong growth in 2016 based on the feedback from our existing and perspective channel partners. Continually declining costs for batteries…

Thank you. [Operator Instructions] And we will go first to Eric Stine of Craig-Hallum.

Hi, Dan. Hi, Tim.

Hi, Eric.

You mentioned your expectation for backlog throughout 2015, I am just wondering if you can talk a little bit about the pipeline, maybe how it looks today entering the year versus a year ago and then just some of the confidence or visibility you are getting from your partners?

Some of them, it’s a little tough to tell you at WESCO, for example, being new. They don’t have a good forecast for us yet, but Gexpro for example especially with their financing place, they are feeling pretty confident about their business plan. What we do see that the difference this year than what we would have guessed last year is the 125 is looking increasing like it’s going to dominate what the additions to backlog are. It’s really – looks like it’s opening up new opportunities for us. We thought it was going to be probably more of a 50:50 mix, but it looks like it’s going to be biased more to the 125 based on the feedback we have so far.

Got it, okay. Good segue to WESCO maybe I know new entrant and it does take some time, I mean are they someone that you think can be a meaningful contributor to 2016. And then I guess along those lines, I mean do you think are they distributing the product and can they become someone like Gexpro who actually has an integrated product with other partners?

They are starting as a distributor. If you look at some other products, they distribute like inverter products like I believe they distribute end phases micro-inverter and some others that are in the space were actually pretty significant in terms of the volume that they move for a lot of these companies. So they have active relationships with the players that are actually deploying products in the space. Their focus initially is to have a commercial scale energy storage product to go out to these target markets. They haven’t identified to us yet whether they want to broaden that role of becoming the system integrator like Gexpro or not, I think it’s a little early in their evaluation process to do that. So it’s primarily going to be a great channel for a lot of the solar and energy efficiency folks that are out there that need ready access to a product to incorporate in projects they are already doing. And that may bring a lot of great relationships there that they are going to be able to leverage to move products, in fact they are already moving products.

Okay, got it. Dan, it’s good to hear. Maybe last one for me just on the technology side, you mentioned the bidirectional switch and B-TRAN I mean you have kind of got those two paths that you are on, I mean do you envision a day when you just – I mean you mentioned that the majority of your focus now is on B-TRAN, I mean is there a day when you kind of put all your eggs in that basket or do you think that these are two technologies that you will go with going forward?

We will not take both of them all the way to commercial product. The things that we are doing on the manufacturing side have so much in common, learning how to for a semiconductor fabricator to get a good bond on a double sided device. Those sort of things are – they benefit both approaches. But as we get a little bit further along, we will eventually just select one as a path to commercialization. And based on the engagements that we are having with third parties and the validation work that’s being done, right now we are leaning to B-TRAN. As I mentioned because of it’s higher predicted performance based on what we have seen so far and the fact that it is something that we truly own from an IP standpoint. But we are not making that call yet. But we will down select what actually comes time to commercialize.

Okay. Thanks a lot.

You’re welcome.

And we will go next to Colin Rusch of Oppenheimer & Company.

Thanks so much, guys. Can you talk a little bit about where the actual applications are, you are seeing with the new 125 kilowatt, are you starting to see meaningful volumes of retrofits of existing solar systems or other renewable systems at this point?

A lot of it is still focused on standalone storage where it’s just larger businesses that have demand charge reduction that’s still probably the dominant source of the orders that we see. But we are seeing quite of bit of interest from people that do want to now start retrofitting some of these facilities where solar has already been put in and they want to go, they come back and add storage as an add-on. But it’s probably I had to guess I would say it maybe 15% to 20% of the opportunities that we are seeing. The standalone storage is probably 75% of it right now.

Okay, perfect. And then as you look out at the utility landscape and looking at the other markets that are really required for some of the higher order applications for some of these technologies, certainly you have got a nice broad base of demand charge reduction assets out there, are you seeing a real movement in terms of signals from ISOs and other folks to really start seeing the software development necessary to look at frequency regulation and voltage management from that existing base of assets?

Yes, we are. In fact, we see several companies out there where their business model is really based on the ability to actually start to tap into those revenue streams. It’s clear that that’s NextEra’s strategy. They ultimately want to own those distributed storage assets so they can tap into those utility streams. You look at companies like Stem and others. They see that value as well. We are actually getting pretty well connected to the folks that really look forward to set the rules and a good example is ERCOT, a lot of the large system folks here in the U.S. runs the Texas grid, they are having a big conference that we actually happen to be the facility they are going to come tour. And I am fortune not to be able to chair one of their substance there. So, we are making sure that we are being connected in terms of capability of technology and we are tying ourselves to the players like NextEra and others who really want to own the assets to actually start to tap into those added revenue streams.

Okay, great. And then if you guys can give us a sense of gross margin trends kind of in a more concrete way, I know you have talked about increasing volumes and lower costs as you go forward with 125 kilowatt and I am sure we will be thinking about kind of single digit movements in gross margin trends or are we going to get bigger chunks like we saw last year when you hit some critical end points for volumes?

Yes. It’s going to be driven by the revenue ramp. I had said in my prepared comments that probably for another quarter here being the first quarter our revenues will be impacted by the introduction of the 125 kilowatt, but as we move into production of the large volume order we will see a good sized bump on the 125 kilowatt contribution to our overall margins. So it can fluctuate pretty – it can be more than a few percentage points fluctuation in our margins as we showed this year, but we will benefit from the upswing of that as we get through the 125 kilowatt later this quarter.

Okay. Thanks a lot guys.

Thanks Colin.

[Operator Instructions] And we will go next to Craig Irwin of ROTH Capital Partners.

Good evening and thank you for taking my questions. So you mentioned CODA and the challenges that they have had, but you have competitors out there that I think have seen similar challenges maybe capital availability of so foray into competing with their customers, we have heard of a significant headcount reduction at your primary competitor, can you maybe discuss whether or not this has impacted conversations with your customers whether or not it’s having new probable customers knock on your door or ramp up their conversations with you versus what – where they were specifically before and if you see this as a competitive advantage over the next couple of quarters?

Well, having competitors get weaker or drop out of the market, it’s a mix bag. I think its part of the natural evolution that needs to happen in the space is just the market itself matures. In general I look at the competitor that you are referring to that we actually already kind of took a lot of customers from them, others were once they kind of lost on their own. I think that as they sort through their issues hopefully will be successful. I think this market is going to be big enough, there is going to be plenty of room for them and others to compete in. We don’t spend too much time focusing on them. We want to make sure that we are really prepared in terms of product capability, cost point performance for the really big folks that will eventually come into this space. We have got the opportunity now that we can do some innovation to drive a lot of costs out of our products to be ready for that. So it’s really the bigger players the ABBs and those sort of folks of the world that will eventually enter the space. But we are keeping our eye on it and making sure we are ready to compete with.

Great. And then just about customers, so when we were at the ESNA conference in San Diego, two customers very specifically said that they were switching to your product. One of them expected to announce in December, the other one was saying that they would announce in the first quarter and I understand that that’s just sort of typical iceberg right, I had heard concrete reports of a third that was saying that they were going to switch over the next couple of quarters and obviously see you are going to be talking to a lot more than just that, can you maybe discuss the gating factors for any announcements whether or not certain customers are looking for fully commissioned products in the field where they can bring reference customers of their own. And what might be impacting the timeline maybe of some of these announcements?

Yes. The customer I think you are referring to that is a big player of it was expecting to announce in December. The issue they have ran into actually was the quality of the battery rack they got. So we are kind of impacted by the rest of the system and how that all comes together and whether players were satisfied with the quality, what happens is for the larger players we send them units that they go into their lab, their engineering team evaluates them, we educate them on the technology, that process it takes time but it’s generally not the gating item, usually it’s putting together the rest of the system. We have at least four significant players I can think of that we are literally trading agreements with as we speak. So, I think it’s really just the pace of the bigger companies go through in terms of qualifying their overall system, making sure they are ready to do a complete system guarantee not just for our piece but the wrap of the battery system and control software and everything else and then the time it takes some of them to negotiate agreement themselves. But I know of all the folks you talked to and we are still very much in play with all of them and hope to be making some announces in the not too distant future.

Fantastic, fantastic. Now, moving on to gross margins, can you maybe discuss whether you can sort of peel out or back out for us the impact of the 125 ramp in the quarter whether or not there are maybe elevated expenses associated with that or other potential one-time items that did impact the margins in the quarter?

Yes, I will let Tim add more color to this. To give you an idea of the sort of the two things that drive the cost of first products in terms of what actually flows through to COGS and the gross margins, things like certifying the product, those sort of things are expense. What we typically run into is the first units that we make we are generally making them in small numbers. We may release our contract manufacturer to make 5 or 10 of them that will need for early sales and for certification. When you are doing that 5 and 10-year sort of time, it’s not very efficient from a procurement standpoint of the parts and components and it’s not the very efficient for the contract manufacturer to make what to them look almost like one-offs. The other thing that we typically run into is as we go through certification, there are always things that we learn about the design that either need to be changed or that we want to change to enhance or alter the performance. So, you end up with changes to actual pieces of hardware that you may have designed for specifically for your products or you need to switch supplier on. So, we typically run into situations where we are paying to expedite materials for those first units as well. So, I would say those two things are probably the biggest contributors to first products, but Tim, I will let you add your own color.

Yes, that is what’s driving it. Our overhead and COGS has remained pretty stable throughout the year. If you look back before the introduction of the 125 to the first half of the year in our gross margins on revenue in the $1 million range, it was in the low double-digits, so 10% to 15% margins. So, the introduction of the 125, I am not going to quantify the exact impact, but it could have been a 10% impact on the overall gross margin at current revenue levels. As we increased revenue level, that overhead number is not going to really change significantly. So, there is the opportunity to really increase the pace in which our margins will increase just along with the revenue.

Great. And then last question if I may before I hop back in the queue. Can you share with us the schedule or maybe tempo of product certifications, re-certifications for this year, so maybe we can understand some of the potential expense volatility that might impact the P&L?

Yes, the first is the work that we are doing for Hawaii for HECO, we will see that in Q1, but it’s relatively small. Australia is probably the next one that we are going to see which I believe is a Q2 event. And then any other international activity is going to be late Q3 or early Q4.

Fantastic. Good to hear and congratulations on the commercial progress.

Thanks, Craig.

And we will go next to Amit Dayal of Rodman & Renshaw.

Thank you. Hi, Dan. Hi, Tim.

How are you?

Good, good, thank you. Congrats on the results and the progress. The story sounds really exciting.

Thank you.

In terms of the R&D spend, this is the bulk of your operating expenses so far, how should we look at this line item shaping up in 2016?

Yes. So, R&D will actually probably be more heavily weighted towards the first half of the year. And the reason why I say that, I communicated this previously as well, but the prototype and development efforts for the B-TRAN are really focused on the starting the third quarter last year and we will run through here the second quarter of this year, where the cost to expedite that work will be borne in those quarters. So, we would expect R&D spend to remain at or near the current levels here for the next couple of quarters. As we get through some of that later in the year even with new product introductions, we potentially will see a decline in the overall R&D spend, but we will continue to be opportunistic. And if we determine that it makes sense from a market perspective to either accelerate development efforts or to add an additional product, it may not have been in our original plan, we will consider that in the impact on R&D, but right now, we are expecting to see it a little bit less in the back half of the year.

Understood. Thank you. And just going back to the backlog, is most of this U.S., is any backlog also attributed to Asia?

When we actually put product at places like Gexpro, for example, we don’t necessarily know at the time of the order where it’s going to go. So, for example, some units that we had already shipped to Gexpro, we found out afterwards they went to South Africa. So, when we are dealing with particularly some of the distributors, because they are global, we don’t really have good visibility into where they are ultimately going to end up until they tell us where they are.

Understood. And just going into we are sort of halfway into the first quarter of 2016, are you satisfied with the progress you are seeing, what’s the performance of the company’s contribution from partnership partners, etcetera have been so far. I mean, has it been in line with your expectations with the positive developments you saw in the fourth quarter has continued sort of in the first quarter of 2015?

We are actually pretty excited about some of the folks that we are actually in discussions with. We look at people that either already are established in the space and are looking to work with us or others that are large, recognizable names that are coming into the space. We feel pretty fortunate that we have been able to attract and I think hopefully, knock on wood, when some of these players. The one thing that I just personally am dissatisfied with and having worked at GE I understand it, but the company has just moved slowly. There are times when you just want to talk, come on guys, can we just get on with it, but they got to go through their process, because we understand that.

Great. And just maybe finally on the B-TRAN, what are the next steps? Do we see any commercialization happening by 2017 on this front?

Yes. I mean, what may actually happen this year depending on whether we believe it is in our best interest to do so, one first thing is you may see is actually license since we have got a semiconductor fabricator that wants to license the technology. But I think the key really is to get to the part, we have some devices that we can let some of these potential end customers start to test and get the agreements in place that will allow semiconductor fabricator to provide product in scale, because people are not going to want to buy a semiconductor device from Ideal Power, they are going to want to buy it from a true semi-fab.

Right, right. Understood. That’s all I have. I will get back in queue. Thank you.

Okay, thank you.

And we will go next to Pierre Maccagno of Northland.

Hi, Don and Tim. Many of my questions are answered, but I had a question regarding the transistor. So, the IGBT if I understand will or continue with that developing that or are you just going to go fully ahead with the B-TRAN?

We are still developing work that applies to both the bidirectional IGBT and the B-TRAN. Right now, it just happened to be people are wondering which one are we going to go with, we are currently technically favoring the B-TRAN, but we are still working on both. As we get further along, we will go down select to just one of them, but we have not made that determination yet.

So, is it based on performance that you are going to decide or which one comes first or?

It’s really based on performance. We see significantly better potential performance with the B-TRAN.

Okay. And then with regard to the Gexpro, so they have a battery with which you are working or basically it’s quite flexible?

The way Gexpro has actually configured their system, they have standardized on LG Chem as their battery provider plus we are battery agnostic. So, if they later want to switch to Samsung or Panasonic or anybody else, because they get a better pricing or performance, it won’t affect our ability to provide a product, but in order to sort of standardize the system, they selected LG Chem.

I see. And just to extend you are working with Sonnen that’s with a different type of architecture or a different type of installer?

Well, Sonnen actually is the – they provide the entire system there, the system integrator. They have a battery supplier of their own. I believe theirs is actually based on Sony is the technology that they are using.

I see. Well, great. Thank you very much.

Thank you.

And we will go next to Bruce Pate of Pate Capital Partners.

Hi Dan, just a quick question on the KACO arrangement, were there any updates you can give us on how that licensing arrangement is going?

Yes. KACO has been going through the process selecting their battery partner. It’s taking them a little while to get through that, simply because they don’t have a lot of in-house battery expertise. KACO here in the U.S. actually has brought some of their team from Germany over to actually join the team here to finalize that process. So I think we are going to see KACO get a little bit more active here as we get into the first half of they. We know they are actively bidding projects already. But I think if they were to win one tomorrow, I think they have a lot of scrambling to do to actually get the system itself together largely because it’s this process to select whose battery they are going to use. We think right now based on the discussions that they share with us they are leaning towards Samsung, but hopefully here by the end of the quarter they will make that selection.

Thank you.

You’re welcome.

And this concludes our question-and-answer session. At this time I would like to turn the conference back to Mr. Brdar for any additional or closing remarks.

I think we have one other question that came in, in writing from a listener is – that question was, please tell us whether Ideal Power’s timing on the residential product is being reconsidered. We actually keep a pretty close eye on what’s happening in the residential market on a regular basis. But because we work with companies like Sonnen and others we haven’t rolled out a residential product. We are really waiting for when we think is the right time to focus on it. So we did something that we actually visit on a pretty regular basis this part of our own long-term product roadmap and our priorities based on what we are actually seeing in a marketplace. So you may see us come back in a quarter or two and say that we are now going to do one or we may decide it still weighs off. Fortunately for us for a new product our cycle of time to actually design and develop a product is not as long as you see in a typical big company because we can leverage so much of the prior designs in terms of control codes and everything else. So if we decided that we want to enter the residential market if we have made that decision today we could literally have a product by the end of the year assuming that we wanted to make it a priority versus other things we might do. So, our message is we continue to evaluate it. We make sure we get good feedback from the partners and channels that we work with and we will continue to do so. So we think there will be a time when it makes sense. We just don’t think that the time is just yet. Any other questions? Okay. I think that answers the questions that we have received through the webcast. I want to thank everybody for joining us today and we look forward to continuing to update you on our progress. Thank you very much.

And this does conclude today’s conference. We thank you for your participation. You may now disconnect.